What is Yearn Finance?
Yearn Finance, launched during DeFi Summer (summer of 2020) is the brainchild of Andre Cronje, who is famously known to “Test in Production”. Yearn Finance is an automated Yield Aggregator built on the Ethereum blockchain and the perfect illustration of what we would like to call “the evancescene of the middleman”.
Having worked in the banking sector and in the investment sector, I understand very well that a product such as Yearn Finance threatens the livelihood of Hedge Fund Managers and Mutual Fund advisors, and that the Financial Industry should keep their eyes on this corner of the Ethereum ecosystem.
Yearn Finance, a community-driven “Robo-Advisor for Yield”, allows users to execute complex Yield aggregating strategies themselves – the wisdom and knowledge of middlemen, who traditionally charged hefty fees to provide guidance, is not needed any longer.
The services of Yearn Finance
Yearn Finance is a complex of different services: APY, Earn, Vaults, Zap, Lending and Cover. Let us take a quick look at each of these service.
APY searches across the lending protocols that Earn uses, and gives the user an estimate for how much interest they can expect to earn, on an annualized basis, for a certain amount of capital.
This service identifies the highest interest rates users can earn lending an asset across protocols such as DYDX, Aave or Compound. Users can then deposit their assets (DAI, USDC, USDT, TUSDT, or sUSD) on Yearn Finance to start earning interest rates on their deposits.
One word about the Earn component’s inner workings. Earn moves around pooled assets of significant size. What this concretely means is that if Earn dumped its holdings all in one place it would obviously change the yield. Earn, then, has to estimate the optimal allocation – and that changes all the time, since users are going in and out of positions constantly. Also, every single time someone deposits or withdrawals from Earn, it also rebalances to optimize the yield for the whole pool.
Vaults is arguably Yearn Finance’s most complex service. These are collections of self-executing investment strategies designed to generate the highest returns from other DeFi projects. These strategies require some coding experience as they are expressed in the programming language known as Solidity. Vaults crowdsource (socialize) gas costs, which is brilliant, they automate the yield generation and rebalancing process and automatically shift capital as needed. A Vault can do the following: use any asset as liquidity; use liquidity as collateral and manage collateral at a safe level in order to avoid a liquidation; borrow stablecoins; put the stablecoins to work via farming; reinvest earned stablecoins.
Zap (which is basically an access point for Zapper.Fi) bundles several trades in one click, saving users a lot of money and a lot of time.
This service allows users to leverage the Cream protocol to lend assets.
This service (an access point for the insurer Nexus Mutual) provides insurance coverage to protect users from potential financial losses caused by faulty Smart contracts (a hedge against Smart Contract Risk). This service has three distinct components: Cover Vaults, Covered Vaults and Claim Governance.
Frankly, crowdsourcing the cost to have transactions executed on the Ethereum blockchain is a fantastic idea. As our readers know, fees, which are a function of network congestion, are rather high these days – though nothing like they were during DeFi Summer! Yearn Finance introduced the idea of fee crowdsourcing, saving their users hundreds if not thousands of dollars as a single Vault account pays for all trades.
How Yearn Finance makes money
How does Yearn Finance make money exactly? Yearn makes a profit by charging 0.5% for withdrawal fees. There is also a 5% gas subsidization gas fee – but this 5% varies depending on the congestion of the Ethereum Network. These rates are not set in stone – they can be changed at any time via following a governance proposal and a vote.
Yearn Finance’s Inner Brilliance
Interestingly enough, Earn allows users to earn interest in the form of the token which they deposit. For example, when a user deposits an asset, Yearn automatically borrows stablecoins against the asset. Stablecoins are then used to seek yield-farming opportunities. As gains get realized, Year converts them back to the underlying token!
Yearn provides a great example of Interoperability and Composability. When users deposit an asset, they are given in exchange ytokens: yDAI is given to users who deposit DAI, yCOMP to users who deposit COMP, and so on, and so forth. These tokens are like receipts. They are a tokenized representation of a deposit and they can be redeemed for the deposit at all times.
Now, here is the really powerful part: in true DeFi fashion, these tokens can be traded or deposited in other areas of the Ethereum Ecosystem, such as Aave or Curve. The latter allows users to deposit and trade assets such as yUSDC, yDAI, yTUSD and yUSDT. This will blow your mind: if a user deposits yDAI in a Curve pool, in exchange, they receive yCRV (a receipt, similar to the one they received from the Yearn platform). They can then deposit yCRV on Yearn and get yUSD!
Yearn Finance has grown larger over the years and is now complemented by four other protocols that add value to its initial offering:
- Ytrade.finance: this service is designed to leverage stablecoin trades.
- Yliquidate.finance: this service facilitates zero capital (via flash loans) automated liquidations for the Aave protocol.
- Yswap.exchange: this is a single-sided automated market maker (AMM)
- Iborrow.finance: this service enables smart contract to smart contract lending.
Yearn Finance completely does away with the need for the wisdom and knowledge of advisors and active fund managers. It is a suite of community-run, evolving, powerful tools that puts the power to execute complex strategies firmly in the hands of its users. If Yearn Finance is a sign of things to come, then the Finance Industry and the Mutual Fund Industry should be worried, and prepared for a mass exodus towards automated financial advisors.